In a tumultuous market environment, investors want to find stocks that they can sleep well at night holding for the long term. What would an investment like that look like? It would feature an unwavering commitment to building shareholder value and returning capital to shareholders, occupy a leading position in a growing industry, and serve a wide variety of customers and end markets to eliminate single-customer risk.
Fortunately, there is a blue-chip stock that checks all of these boxes: Texas Instruments (TXN 1.41%). Here are five reasons that Texas Instruments looks like the type of stock that you can buy now and hold forever.
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Wonderful company at a fair price
With a price-to-earnings multiple of about 18, Texas Instruments doesn't stand out as particularly cheap, but it certainly isn't expensive either. This is about in line with the average multiple of the S&P 500 tech sector and not far above the average multiple for the broader S&P 500.
So with a multiple roughly in line with technology peers and the broader market, I would call Texas Instruments' valuation fair. As Warren Buffett has famously said, "It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price." So what makes Texas Instruments a wonderful company?
Steadfast commitment to shareholder value
Texas Instruments is a shining example of a company that views creating shareholder value as a top priority. Longtime CEO Rich Templeton has made a point of saying: "The best measure to judge a company's performance over time is growth of free cash flow per share, and we believe that's what drives long-term value for our owners." By this measure, Texas Instruments has been a stellar performer, growing free cash flow per share at 12% a year since 2004, when Templeton took over as president and CEO.
Texas Instruments also pays out an attractive dividend which currently yields 3%. The company has increased its annual dividend payout for 18 years in a row, and I expect that it will become a Dividend Aristocrat seven years from now. The company has increased the dividend payout at a 25% CAGR (compound annual growth rate), so these are meaningful increases for shareholders, not just token increases so that management can check off another year on its scorecard.
In addition to dividends, the management team is also using share repurchases to create value for shareholders. Since 2004, Texas Instruments' share count has decreased by 46%, meaning that management has taken nearly half of its shares off the open market. This is great for shareholders because reducing the number of shares increases earnings per share and can be a sign that management thinks shares are trading at levels below the company's intrinsic value. In September, Texas Instruments' Board announced a new $15 billion buyback authorization, which is no small matter as it equates to about 10% of its current market cap.
Impressive track record
Texas Instruments' stock has a track record that's hard to beat. Pick whichever time frame you want, and Texas Instruments has given its investors excellent returns. Shares of Texas Instruments are down 15% year to date. That's better than the S&P 500 and Nasdaq composite, which are down 23.5% and 30% year to date, respectively.
Over the past five years, shares of Texas Instruments have returned 80%, and over the past 10 years, the stock has nearly quintupled with a gain of 485%. The market is of course forward-looking, not backward-looking, but Texas Instruments' long history of strong performance instills confidence that it will continue to reward shareholders for many years to come. Here's an additional reason why the business looks set to grow over the long term...
All about analog
Texas Instruments is a leader in analog and embedded chips. Analog chips make up 77% of its revenue. While digital chips get most of the headlines, analog chips are crucial because all electronic devices that have digital chips need analog chips as well.
Analog chips regulate power consumption and give digital chips information from the outside world. So as the world "goes digital," more analog chips will be needed. Think of Internet of Things (IoT)-enabled devices like refrigerators or cars which wouldn't have been digitally connected a decade or so ago, for which this is now the default expectation. All of these devices need analog chips, and Texas Instruments is the market leader.
100,000 customers
Texas Instruments is incredibly diversified -- the company makes over 80,000 products and serves an astounding 100,000 customers. Over 40% of Texas Instruments' revenue comes from customers outside of its top 100. Looking at end markets, 41% of Texas Instruments' revenue comes from industrial customers, 24% is from personal electronics, and 21% is from automotive. This helps to protect it from the risk of any one customer or end market cutting back on spending.
This is a key reason why Texas Instruments has held up better than many other semiconductor stocks so far this year. For comparison, the VanEck Semiconductor ETF, which holds Texas Instruments, is down about 38% year to date.
At the end of the day, smart investors want to own shares of companies that are increasing shareholder value over time. Texas Instruments has demonstrated a strong commitment to doing this through all market environments. With this strong focus on what is most important, its steadily growing dividend, market leadership in a growing and crucial industry, and diversification across a wide variety of end markets, Texas Instruments looks like a stock that investors can buy confidently now and hold comfortably forever.
